MW February's 'panic' rotation in stocks sets the stage for more tumult in March

By Isabel Wang

February's anti-AI trade has been driving a dramatic rotation under the surface of the stock market. Has it gone too far already?

A rare alliance against Big Tech came together in February. Now that could be put to the test.

February has brought a sharp rotation away from the group of megacap tech stocks known as the Magnificent Seven MAGS, sparking an "everything but tech" rally that lifted economically sensitive names as well as recession shelters.

That unusual unity, however, may already be starting to crack as the month draws to a close, suggesting the market's temporary alliance against Big Tech may not last.

In February, defensive sectors like consumer staples and utilities XX:SP500.55 have surged alongside economically sensitive groups such as industrials and materials, while technology stocks XX:SP500.45 have been under sharp pressure.

This comes as concerns about tech spending and artificial intelligence were on full display this week, with the big drop in Nvidia's stock (NVDA) that followed its blowout earnings report dragging the rest of the stock market lower.

See: Why Nvidia's stock is falling despite a historic earnings beat

That backdrop has led to the S&P 500's SPX consumer staples XX:SP500.30, industrials XX:SP500.20 and materials XX:SP500.15 sectors being among the best-performing of the large-cap benchmark index's 11 sectors so far in February, with each up over 6.3%, while the S&P 500 has fallen 0.4% in the same period, according to FactSet data (see table below).

SOURCE: DOW JONES MARKET DATA; FACTSET

"I don't think anybody had that on their bingo card coming into 2026," said Stephen Hoedt, head of equities at Key Private Bank. "It has created a really difficult environment for market participants to navigate, because there's no playbook that you could come up with over the last 10 years where cyclicals and and defensives were rallying at the same time while tech was getting smashed."

Cyclicals and defensive stocks rarely move in tandem, as they tend to benefit from different, and often opposing, market and economic conditions.

Defensive stocks are shares of companies that provide essential goods and services that tend to remain in demand regardless of economic conditions. These safe-haven investments often offer low volatility and could help protect investors from market downturns, but they generally lag during bull markets. Cyclical stocks, on the other hand, are closely tied to the economic cycle. They typically perform well during expansions, but could underperform during economic downturns or even recessions.

A central theme around the rapid pace of AI advancements is that it could be a driving force for growth. But it also might trigger painful job losses and render some business lines obsolete, which could ultimately hurt the consumer-centric U.S. economy.

Meanwhile, investors have focused on the consumer staples sector, which was up a total of 14.2% in January and February, while the industrials sector rose 13% and materials stocks were up 15.7% in the year to date, according to FactSet data.

See: The S&P 500 is caught in an extremely narrow trading range. What's happening beneath the surface could decide where the index goes next.

More broadly, there has been a rising "united front" against Big Tech that has "nothing to do with economic conditions," Hoedt told MarketWatch in a phone interview.

"But it has everything to do with the market looking for stuff that is not AI impacted and figuring out what is a safe place to hide. What we see here is the anti-AI trade really writ large in these sector rotations," he said.

Cyclicals may extend their leadership

According to Hoedt, the correlation between cyclicals and defensive stocks is likely to break down soon, as defensive trades become crowded and expensive. Should the economy run hot, cyclical stocks could see further gains from here.

"It strikes us that the defensive trade has gotten a bit overcooked and crowded. But we don't think that people are going to back off the cyclicals when we're in a hot economy, so cyclicals are the place to be in," he said.

See: Block plans to lay off nearly half its staff in 'deliberate and bold' embrace of AI

Economic conditions remain a wild card for the rest of 2026 as investors parse how AI will reshape the labor market.

Ken Mahoney, president and chief executive officer at Mahoney Asset Management, said that cyclicals such as industrials and materials are also benefiting from the rise of "physical AI" as they provide support in the build-out of infrastructure, including power grids, data centers and factories, that will support the next phase of the AI race.

"Technology stories are usually more exciting than the materials, but you need all these materials to get up and running for all the contracts that have been signed and construction to be done in the next few years," Mahoney told MarketWatch via phone on Thursday.

That's why the rally in materials and industrials "still has legs," he added.

See: AI jitters are turning discount chains and shampoo makers into the stock market's hottest trade - and that's risky

U.S. stocks were lower on Friday. The Nasdaq composite COMP was down 0.8% and the S&P 500 was off 0.6%. The Dow Jones Industrial Average DJIA was 1.2% lower, according to FactSet data.

-Isabel Wang

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

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February 27, 2026 11:25 ET (16:25 GMT)

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